Realizing that the Old Horse did not come back with them from Loonie Land, Raggedy Ann and Andy return to Loonie Land the next night. They are guided by an old Loonie to the castle of the Dreadful Dragon, who they befriend. The Dragon flies them around until they find the Old Horse. After being reunited, the group finds that the Loonies have been taken by a giant.; Raggedy Ann and Andy become entangled in Marcella's balloons and are carried into the sky. After landing on an island they are captured by the Snoopwiggy and Grinny Bear, who have a jumping sailboat. The quartet all end up tangled in the balloons and float away to the castle of Prince Gallant and Princess Joy, the true owners of the jumping sailboat.; When items begin disappearing from the toy room, Raggedy Andy stays awake and finds that a Loonie is taking them. He and Raggedy Ann trail the Loonie to a mysterious tree which is the entrance to the land of the Loonies. They explore the strange land until they find the missing items.